How can the free cash flow approach to valuing a company be used to solve the valuation challenge present by firms that do not pay dividends? Compare and contrast this model to the dividend valuation model?
Here is some information about the Dividend Valuation Model:
The dividend discount model is a more conservative variation of discounted cash flows, that says a share of stock is worth the present value of its future dividends, rather than its earnings. This model was popularized by John Burr Williams in The Theory of Investment Value. Williams wrote his book in the 1930s, when people were trying to establish a science of investing after getting burned by the irrational exuberance and accounting tricks of the previous decade. (Plus ca change, Jack.) Williams decided that reported earnings were way too nebulous to be trusted, like buying "bees for their buzz" instead of their honey, and that the only return you could really believe in was an actual check in the mail:
... a stock is worth the present value of all the dividends ever to be paid upon ...